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First-time buyers – how to build a house deposit

Last week the Royal Institute of Chartered Surveyors doubled its UK house price growth prediction for 2015 to 6% for the year. For first-time buyers this will be unwelcome news, particularly after summer rumblings that the house price rises were finally slowing.

High deposit targets for first-time buyers

Even though the cost of a mortgage is often lower than rent, high property values place even a 5% deposit out of reach for many hopeful buyers. In fact, in a recent Zopa survey of lenders aged 18-40, almost half were aiming for a deposit pot of £40,000, which is more than the UK average annual income.

The continued rapid growth in prices adds an extra time pressure to the already daunting task of accumulating many thousands of pounds for a deposit. For many, a few months delay can mean being priced out of their ideal area or compromising on the type of property they eventually buy.

Raising a deposit

A recent MoneyFacts article ‘How will you raise a house deposit?’ looked at how people can build that pot of money as fast as possible.

A key step is putting your outgoings in order, particularly as they will come under scrutiny during the mortgage affordability checks. Our own survey of lenders found that over half are cutting back on clothes and other purchases and more than two out of three people are eating out less, going on fewer or cheaper holidays and choosing cheaper options for household essentials to boost their savings. Surprisingly, one in four people claim they are making no lifestyle changes at all.

Our research also found that withdrawals from the Bank of Mum and Dad are increasingly forming part of first-time deposits, with almost half expecting a helping hand. Unsurprisingly given soaring deposits, the size of parental assistance is also on the rise. For example, 28% of parental cash injections on recent purchases were of £45,000 or over, compared to just 8% of parental contributions for properties brought over ten years ago.

Around one in five are also taking advantage of government schemes, such as Help-to-Buy.

Exploring alternatives

Alternative finance options, like peer-to-peer lending through Zopa, are helping savvy first-time buyers reduce the time it takes to raise a deposit by earning higher returns. The survey found that two thirds of the Zopa lenders looking to buy were using their peer-to-peer investments to build up their deposit, and over half of these believe it will take at least six months off the time they need to wait until they can buy.

From next April, favourable tax treatment for peer-to-peer investments (in the shape of the new Innovative Finance ISA and the inclusion of returns in the Annual Savings Allowance) will mean even more will go straight into their deposit pots. You can read more about how peer-to-peer investments can fit into a deposit-building strategy in this post from last month.

Moving on to the property ladder is something many people aspire to, but rising deposit values continue to push the first rung higher and higher. This upward trend shows no sign of abating any time soon and first-time buyers need all the help they can get to meet their deposit target.

Peer-to-peer lending is not risk free as your capital is at risk.